NCPA - National Center for Policy Analysis

Drug Price Controls Don't Work In Canada, Either

May 17, 2000

Last week, Maine became the first state to enact price controls on prescription drugs. Drugs often sell for significantly less in nearby Canada, due to drug price controls. If Canada is not suffering any negative effects from price controls, why shouldn't Americans have the same benefits?

The only reason price controls work in Canada is because Canada is what economists call a "free rider," someone who takes advantage of a cost that someone else is paying. In this case, the cost is drug research and development, most of which takes place in the United States. Almost none is done in Canada because drug companies cannot make a profit there due to price controls.

Anyone who can avoid development and testing expenses will be able to sell drugs at a lower price. The problem is that not everyone can be a free rider; in the end, someone has to pay for research and development.

The situation in Canada is not as good as it is often portrayed:

  • David Gratzer, author of "Code Blue," a new book about Canada's health system, points out that price controls only lower the cost of patented, name-brand drugs in Canada.
  • Generic drugs, which account for almost half of all prescriptions in the U.S., actually cost less here.
  • Also, many of the newest drugs are simply unavailable in Canada because the government restricts their use in order to keep costs down.

Price controls never work for very long, but are extremely difficult to lift once imposed. The classic example is rent control in New York City. Imposed as a "temporary" measure during World War II, the controls continue to the present day. The result has been a steady deterioration in the housing stock, and rents are actually higher in many cases than would exist without rent controls.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, May 17, 2000.


Browse more articles on Health Issues